Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.
Thursday, February 8, 18
Equity Market Recap
· It was another rough trading session for U.S. stocks with more than 3% declines for all major averages, as each also turns negative for the year in a brutal week thus far. Markets felt the reverberations of Monday’s selloff as 10-year treasury yields climbed back to 4-year highs around 2.88% (raising borrowing cost/inflation fears). The Dow Industrials fell over 1,000 points late day (3%) and down about 2,600 from recent record peaks, the S&P traded back below its 100-day moving average support (2,638) while the NASDAQ fell below its 100-day moving average support of 6,856, as it underperformed. Overall, it was another broad-based bloodbath as financials failed to bounce with higher yields, healthcare continued its demise, energy prices fall with oil (down a 5th straight day) though defensive assets fared the best (Telecom and utilities). Coming into today, the three main gauges were down between 2.5% and 2.9% for the week after tumbling Monday, rallying Tuesday and suffering modest losses Wednesday. Europe extended losses as well with German’s Dax index falling, now 10% below its January 23rd closing highs. Rising rate hike expectations, rising inflation forecasts and volatility have dominated the news, overshadowing a deluge of earnings results the last few days.
· Volatility remains a force: concerns about leveraged ETFs ETNs this week really grabbing the markets attention when it turns to volatility…today was no different (recall last night, CBOE hosted a conference call to discuss – Cboe says no major impact expected from Vix products’ demise). The VelocityShares Daily Inverse VIX Short Term ETN (XIV) had ballooned to a value of about $2 billion, but coughed up nearly all of it, sinking to around $15 million when the measure of volatility that it tracks, the Cboe Volatility Index (VIX) saw a record spike. Marketwatch.com
· WTI crude oil settles at $61.15 per barrel, down 64c or 1% (highs $62.09 and lows $60.59) – its 5th straight daily decline and to the lowest level in 5-weeks a day after data showed record weekly U.S. crude output and a further rise in inventories. Oil prices fell yesterday after the EIA said domestic crude production rose last week to 10.251M barrels a day—a weekly record despite inventories showing a greater drawdown than expected.
· Gold futures settled higher, rising $4.40, or 0.3%, to settle at $1,319 an ounce, after losing more than 1% Wednesday and snapped its four-day losing streak. Gold prices had been pressured the last few days amid rising bond yields, rising interest rate hike expectations, and a strengthening dollar, which makes the asset more expensive to foreign buyers.
· The U.S. dollar index (DXY) ended little changed, off earlier lows against the British pound which had jumped more than 1% initially as the Bank of England made a hawkish tilt and suggested faster interest rate hikes (GBP 1.4067 highs from lows 1.3846 – but pared gains); the euro was flat late day vs. the dollar at 1.2264 while the dollar bounced off lows vs. the yen…but still down by -0.4% at 108.93 (off lows 108.58)
· Another volatile day for bonds, opening the day lower with yields rising (10-year touched morning highs of 2.875% up 5 bps – just off the weekly 4-year high of 2.883%), but it wasn’t to last. After a brief rally to safety pushed yields lower midday (as stocks dropped with the Dow falling over 650 points), bond selling resumed following the second straight tepid Treasury auction. The U.S. Treasury sold $16B in 30-yr notes at a yield of 3.121%, below the 3.109% when issued prior, but even with higher yield, auction saw low demand as the bid-to-cover came in at 2.26 well below the 2.74 in prior auction, while indirects awarded 61.2% of the bonds (the 30-yr followed a “soft” 10-yr auction yesterday). The 10-year proceeded to rally off lows around 2.81% to 2.85% midday after the results. Yields got a lift earlier after the Bank of England said strong inflation could bring forward the schedule for rate increases (renewing the fears of rising inflation prospects in the US).
· U.S. initial jobless claims fall 9,000 to 221Kin early February and was below the 232K estimate, while the prior week was unrevised at 230K; the Four-week jobless claims average drops 10,000 to 224,500; Continuing claims fell 33k to 1.923m in the week ending Jan. 27
· MBA delinquencies rose to 5.17% in Q4; the delinquency rate for mortgage loans on 1-to-4 unit residential properties rose to 5.17% in the fourth quarter from 4.88% the prior quarter; the delinquency rate rose to the highest since 2nd-quarter 2015; foreclosure rate fell to 1.19% in the fourth quarter after 1.23% in the third quarter
· The benchmark 30-year fixed-rate mortgage averaged 4.32% during the week ending Feb. 8, Freddie Mac said Thursday. That was up 10 basis points from the prior week and leaves rates more than 30 basis points higher than where they started the year. The 15-year fixed-rate mortgage averaged 3.77%, up from 3.68%.
Sector News Breakdown
· Auto sector; TSLA posts larger-than-expected quarterly loss on lower gross margins and higher operating costs/operating cash flow positive and reiterates Model 3 production targets; in auto parts retailers, ORLY said CEO will step down and 1Q earnings forecast midpoint missed the average of analysts’ estimates, but tax benefits and higher comps help; auto supplier BWA drops as Q4 results topped views, but Qi guidance fell short of consensus (weighs on other suppliers); GT shares dropped after cutting 2020 segment operating income view
· Retailers; HBI falls in retail after guiding Q1 and year profit below consensus; LB reported January comp sales up 7%, above the 1.8% estimate and higher EPS due to tax benefits (strong Bath & Body comps); COST Jan. comp. sales up 6% vs est. up 3.8% and Jan. U.S. comp. sales ex fuel up 3.6% vs est. up 2.1%; CATO Jan comps fall (-6%) on wider Q4 EPS loss; BKE Jan comps rise 0.2% vs. est. loss (-3.2%); in sporting goods, VSTO rallies as Q3 tops forecasts; GOOS falling from record highs yesterday after earnings beat but provided no update to guidance
· Consumer Staples; protein stocks rise after TSN results as Q1 EPS and sales that topped estimates (group bounces – PPC, SAFM, HRL – after recent weakness since Jan. 31 Dow Jones report that SYY and USFD sued chicken companies, claiming companies coordinated poultry supplies; in food, Kellogg (K) Q4 EPS in-line on higher than expected sales; in tobacco PM shares active on earnings results; EPC falls on weak organic sales and gross margin weakness was driven by lower volumes, unfavorable price/mix, higher input costs; COTY rises as recent acquisitions fuel quarterly profit, revenue beat; FLO posts earnings/revenue beat for Q4
· Housing & Building Products; IRBT shares dropped as weak forecasts for 2018 operating margin and EPS overshadow quarterly results that topped estimates; SNA shares dropped after sales decline; in building products, MAS falls as FY EPS forecast comes in below views
· Casino, Lodging & Leisure; gold club maker ELY posted narrower Q4 EPS loss on higher revs and guidance also topped consensus; in gaming, PENN mixed Q4 results as revs beat but Ebitda fell short of consensus; casinos fall after MLCO posted Q4 results that missed largely due to low VIP hold in Macau according to one analyst (WYNN, LVS, MGM)
· Energy stocks have had a rough week and a half, falling in-line with weaker earnings and production numbers along with a decline in oil prices; look at Dow component XOMchart – stock grinded from lows of around $76 in late August to highs of $89.30 before earnings last week…but the stock has nearly given all of it back in just 5-days since after its weaker earnings
· E&P movers; SWN shares jumped after the company said its pursuing options for assets in Arkansas’ Fayetteville gas basin that one analyst values at $2.1 billion; GPRE rises despite 4Q results with revenues, EBITDA, and adj. EPS below expectations; PTEN shares dropped over 10% after reporting a larger than expected Q4 loss and mounting worries over last month’s explosion at an Oklahoma well that killed five workers.
· Other movers; Utilities managed to hold up well despite the broad market decline, as investors rotated into defensive asset classes; ENS shares rose on earnings; MLPs were lower, with the Alerian MLP Index falling over 1.5% (and now down nearly 10% from 2-weeks ago), led by declines in NS after announcing plans to absorb related entities and slash its payout by 45%
· Large Cap banks were down with the broader markets, as shares of JPM, WFC, C, GS, BAC all came under pressure; in insurance; XL was upgraded to hold at Deutsche Bank noting press reports indicate that XL may be in talks to be acquired by Allianz; ALL Q4 EPS topped estimates on materially lower catastrophe losses compared expectations, but underlying margins missed some estimates; PRU quarter benefitted from above average variable investment income, partially offset by less favorable claims trends; other movers on earnings in the broader financial space: VIRT shares jumped on better earnings results; in consumer finance, FISV Q4 results topped views, leading shares higher as investors overlooked the softer outlook
· REITs; COR shares dropped after noted its lower year guidance reflects adoption of two new accounting standards, revenue recognition and lease accounting, which together are expected to reduce FFO by 6c; ESS Q4 FFO with modest beat and guidance for year at midpoint of est.
· Pharma movers; TEVA shares drop after 2018 guidance came in below consensus saying profit and sales will slump further this year/notes deterioration in U.S. generics market/says to pay back $3.5B in debt this year; LCI shares fall as sales were below consensus and EPS beat was primarily driven by a lower tax rate and spending
· Biotech movers; REGN bounce after earnings beat, coming off 52-week low on Tuesday of $319.50; ALXN Q4 EPS and revenue top consensus though rev guidance for year below views on lower outlook for Soliris revs; ALNY posted wider than expected Q4 EPS loss
· Several deal pricings overnight: ADVM 8.9M share Spot Secondary priced at $6.75; VIVE 10M share Spot Secondary priced at $3.00; EOLS 5M share IPO priced at $12.00;MNOV 4.42M share Spot Secondary priced at $9.05
· Healthcare services and devices; CAH boosted its outlook for FY2018 adj. EPS to $5.25-$5.50 from $4.85-$5.10 previously due to tax reform and said anticipates overall operating performance to be as expected; CVS Q4 eps and sales beat views, falls on increased spending; other movers on earnings:
Industrials & Materials
· Aerospace & Defense; WWD shares rallied after the WSJ reported that BA is in talks to buy the aircraft-parts supplier noting while the discussions have been going on for months, there’s no guarantee a deal will be reached, https://goo.gl/beSZ9H ; TDG was upgraded to equal-weight at Stephens saying the end-market tailwinds for commercial aftermarket and defense are likely to outweigh other concerns in the near term
· Machinery and Agriculture; U.S. corn inventories at the end of the current marketing year may be 5% less than last month’s estimate, as lower prices make domestic grain more attractive on world markets. Ending stocks of corn as of Aug. 31, 2018 may be 2.352 billion bushels, according to a U.S.D.A. report, lower than any forecast made in a Bloomberg survey (est. 2.05 bln bushels)
· Paper & Packaging; UFS shares slide after 4Q Ebitda of $141M was below consensus of $159M, and weaker 2018 outlook for Personal Care; KS was downgraded to hold at Deutsche Bank; CCK dropped as Q4 met estimates but guidance mid-point below views
Technology, Media & Telecom
· Internet; GRUB shares rally as reported better than expected Q4 results and announced a changing partnership with Yum Brands, which will take a $200M equity stake in the company; TWTR posts its first quarterly profit while advertising revenue grew 8% y/y excluding TellApart, which is higher than expected/negative, weaker-than-expected MAUs in 4Q; YELP slides as reported in line Q4 results with mixed guidance/revenue outlook was pretty much in line and EBITDA outlook was below consensus for both Q1 and for full year 2018.
· Semiconductors; IPHI shares dropped as 4Q was about in-line with expectations, but guided 1Q significantly below estimates as weakness at the company broadened from the expected drop in China to also include a pause/lack of ramp in ColorZ and a transitional drop in ClariPhy; SYNA results roughly in-line with expectations with March guidance but below the Street; COHR shares drop as midpoint of guidance missed expectations on FX headwinds and one LineBeam 1000 delivery ($10M ASP) shifting into the June quarter
· Software movers; LOGM to buy closely held Jive Communications for $342M; GLUU said it’s in the early stages of developing a mobile video game with Disney Consumer Products and Interactive Media; TTWO slips initially after worse-than-expected Q3 revenue; CRM said it will invest $2B into Canadian business
· Hardware movers; KN results and guidance below estimates on weaker than expected iPhone sales as well as continued weakness in China; INFN better than expected results and guidance as expects to grow revenue 10%+ in full year 2018 while expanding GMs 3%-5% from Q1 guidance levels of 40%; QTM weak as received a subpoena from the SEC related to its accounting practices and internal controls for revenue recognition; ZNGA reported 4Q upside, bolstered by the Words with Friends launch and related advertising, and Poker and CSR racing mobile growth/bookings at $223M, up 9% YoY
· Telco & Media movers; FOXA reported in-line to better F2Q results, as stronger revenue was offset by higher costs, leading to in-line; IAC reported better than expected 4Q17 revenue and EBITDA, with stronger than expected results at MTCH (already reported), Publishing and Video; VIAB quarterly revenue drops on weak cable, film results but profit boosted by tax cuts; ZAYO reported solid C4Q results that were relatively in-line when considering one-time benefits to revenue & OIBDA; TMUS reports results but shares slip as company forecast 2M-3M new branded post-paid customers in 2018, fewer than the 3.6M subs in 2017 and a fourth straight year of slower growth; NLSN fell after earnings, while NYT advanced on results